Financial Sludge

The opposite of nudge is sludge.

Many financial firms sign people up for products they don’t want or need. Compounding their sins, some companies make it very difficult for customers to escape.

They sludge them with complicated, confusing and time-consuming paperwork.

Take a look at what serial offender Wells Fargo has done. As a way to atone for overcharging 110,000 of their customers, they decided to make these individuals’ lives more miserable.

Wells implemented their own form of sludgery.

“The Wall Street Journal reported this week that the bank will offer to reimburse those customers by mailing them form letters and asking customers to opt in to receive repayment and mail back a form to get their check. Because so few people typically respond to form letters from businesses, Wells Fargo expects that only “half or fewer” of the people it owes money to will take the bank up on the refund offer.”*

Wells denies the charges.

Nobel-prize winning behavioral economist, Richard Thaler, called them out in this tweet:

Thaler is the author of Nudge. His work is designed to nudge behavior for good (e.g., making the default choice in 401(k) plans to opt-in); not sludge it for evil.  Unless employees sign paperwork declining to opt-in, they will become regular savers; a good thing.

Most people let inertia take over. Thaler found a way to use his knowledge of behavioral economics for public benefit; nudging people to save for retirement when they otherwise would not.

This has helped workers increase their contributions by $29.6 billion, according to a report by UCLA professor Shlomo Benartzi.

Wells has decided to use this knowledge in a nefarious manner.

Professor Thaler is fully aware of the consequences if these concepts fall into the wrong hands. In an interview with MarketWatch, Thaler states, “Whenever anyone asks me to sign a copy of the book ‘Nudge’ I sign it ‘nudge for good’ which is a plea, not an expectation, because it is possible for actors in both the public and private sector to nudge for evil.”

Thaler defines sludge as “intentionally slowing down the process by which a customer gets what is rightfully hers.”

We see this every day in the slime pit more commonly known as K-12 non-ERISA 403(b) plans.

Many insurance companies and high-fee brokers deliberately make transferring funds as uncomfortable as humanly possible. They are playing a game of “run out the clock;” intentionally making things so time-consuming and complicated that clients just give up trying to move their OWN MONEY to more suitable and lower-cost investments.

Their sludge tactics include:

  • Demanding a  Medallion signature guarantee, which requires finding a bank and paying a fee (normally this is used for the transfer of stock certificates or physical gold, not $50,000 403(b) accounts);
  • Making clients fill out confusing paperwork;
  • Sending out the wrong paperwork to clients and then taking weeks to tell clients they need to submit different paperwork;
  • Taking weeks to process the paperwork and then rejecting it because it was dated more than 30 days ago;
  • Employing surly and condescending phone reps who give misleading and conflicting information;
  • Using physical mail to send out forms instead having them available on the firm’s website or in PDF form;
  • Mailing physical checks rather than using wire transfers to move the assets to the new accounts;
  • Trying to convince clients to stay by lying with lines like, “there are no fees” and “everyone charges the same;”
  • Threatening “tax consequences” for normal tax-free exchanges; and
  • Creating duplicative forms designed to be a time suck.

Deliberately gunking up the system is a sign of a failed business model.

A culture based on employing an army of conflicted financial salespeople is so 1970s. Time has passed these guys by and they are using desperate tactics to delay the inevitable.

Companies who do this kind of stuff will eventually be “nudged out of business.”

Consumers are the final judge of sludge.

We are awaiting their verdict.


* Source: Albrecht, Leslie. “Richard Thaler, Nobel Prize-Winning Economist, Says Wells Fargo Is ‘Slimy.'” MarketWatch, February 18, 2018.

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